The future for Breakout Nations

Posted onJune 12, 2012|Comments Off on The future for Breakout Nations

I haven’t yet read Ruchir Sharma’s Breakout Nations (if you must know, I’m in the middle of reading this), but this recent excerpt of Sharma’s book in Forbes, followed by Leopard Capital’s consequent review got me to thinking more about general things that set developing countries apart from developed countries today.

A few months back, I took a quick stab at this, but I thought I’d try this from another angle this time with what I’ve found to be easily one of the biggest obstacles to doing business in some of these countries, from a conceptual standpoint as well as from a practical standpoint. I don’t know if Mr. Sharma explicitly mentions this obstacle in his book by name, but without even reading it I have no doubt it is underneath everything he has to say about breakout nations. The concept is very simple: how to plan for the future.

I was out to dinner last week with a couple I’m friendly with who have been doing a lot of work recently in the South Sudan after working on a range of other projects across Africa over the past decade. In the course of discussing what they saw on their most recent trip there, the husband dropped a remark about how frustrating it is to find people willing and able to plan ahead beyond the next day.

My knee-jerk response was that that’s not a problem unique to the South Sudan or even Africa, but exists quite prominently across everywhere in the developing world I’ve ever been. Certain reasons are culture-specific, but to the extent that it transcends borders, it stems directly from unstable security (and therefore rule of law, which features prominently in the Forbes excerpt) in other areas of daily life. More bluntly, if you know there’s an ongoing risk of a war, a coup, an assault or a devaluation, and you’ve even lived through one or several before, thinking ahead several years must seem like folly, and that’s the polite way of putting it.

Of course, given the state of certain developed countries today, we might be tempted to extend this challenge everywhere, but the very existence of certain institutions in developed countries, however precarious, is an indication of forward thinking. It also says something about how a society treats the concept of time (that the English expression, “time value of money” even exists I’ve always thought was quite telling).

Nowhere is this more obvious than in what I call financial market “length”. Whereas financial market depth is often meant to refer to volume and liquidity of capital or assets (and I suppose “width” might refer to the variety available), length, for lack of a better word, I mean to refer to how far into the future prevailing financial instruments extend. “Length” of a country’s financial market dictates how far into the future a government borrows money (and therefore how far it plans), or alternatively, how far into the future investors trust the government in question will be able to honor its obligations.

The most immediate example of this for a long time was the 30-year sovereign bond, something taken for granted in North America, Japan, Australia or Western Europe (oops), and increasingly scarce beyond those markets. The use of 30 years as a benchmark has loosened slightly in recent years to account for issue size, volatility and other factors, but even allowing for shorter maturities – 20 years, let’s say – yields a list not much longer than where we were a decade ago, and some of these countries still cannot borrow in their own currency (see Citibank’s 2012 Global Fixed Income Index Catalog for a deeper view into this from a market-maker’s perspective).

Once there’s a long-term government bond, then this allows a long-term benchmark interest rate, and a lot of other things fall into place for local market development and more streamlined transaction processes. But for a government to be at a point of being able to borrow for that length of time is in itself an implication that the government has demonstrated an ability to plan for the future.

The persistent absence of so many countries from this corner of global financial markets illustrates rather starkly how far the rest of the world has to go.